Under the ALF model, participant deposits are backed by a fund of high-quality Shari’ah-compliant securities known as Sukuk. The return from these instruments, net of operating costs, will be paid to depositors instead of interest. In the first instance, the fund has purchased Sukuk issued by the Islamic Development Bank.
Commenting, Head of Sterling Markets, Rhys Phillips said; “the ALF will help the UK Islamic finance sector to compete with conventional peers while staying true to their founding principles; and will further strengthen the United Kingdom’s role as the leading international financial center for Islamic finance outside the Muslim world.”
Why ALF Needed For Local Islamic Banks?
- Islamic banking is a relatively young but growing sector of the broader financial services industry. Numerous banks around the world offer Islamic, or Shari’ah-compliant, financial products. Among other things, this activity avoids the payment or receipt of interest.
- Islamic banks in the UK are subject to the same strict regulatory requirements as conventional banks. This includes holding a buffer of high-quality liquid assets (HQLA), to meet obligations as they fall due. Conventional banks can hold deposits at the central bank to help meet their buffer requirements, but Islamic banks have been unable to do this previously because deposits at the Bank of England are typically interest-bearing.
- As part of its commitment to diversity, innovation, and financial inclusion, the Bank has therefore established the ALF. This will help level the playing field by enabling Islamic banks – and any other UK banks facing formal restrictions from engaging in an interest-based activity – to hold deposits at the central bank.
- Further information on Islamic banking and the Bank’s work in this area can be found in this 2017 Quarterly Bulletin article and the December 2020 speech given by Andrew Hauser.